STUART THEOBALD: Shifty shades of grey

Later this month, SA will be greylisted by the Financial Action Task Force (FATF). This will put the world on alert that SA is a gangster state. Well, I embellish. The FATF’s wording is that greylisted countries have “strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing”. Proliferation of weapons of mass destruction, that is.

The consequences of greylisting are that other countries must treat SA with a heightened level of suspicion. Several countries require their institutions to apply “enhanced due diligence” of SA counterparts. In practice this means more frequent assessments, requests for more details on sources of funds and procedures, more senior management engagement with foreign counterparts. That is if those counterparts will do business with South Africans at all.

It effectively means transaction costs will go up for SA businesses and individuals — in the form of fees, time of senior management, increased search time for counterparts who will handle SA business and documentation required for compliance. This is certainly bad for growth, though putting specific numbers on it is hard.

I should say, lest I be accused of exaggerating, that the channels that are officially affected will be limited. The impact is going to be on payments through foreign banks, as well as official flows from multilaterals and counterpart governments. There will not be a big impact on portfolio capital flows, for example. But there is also a general reputational impact — one that will be far more expensive than putting SA on the sleeves of a UK football team.

This is going to happen despite a Herculean effort by many in the government and associated regulators to fix the various problems identified by the FATF in its 2021 report on SA.

Representatives of 14 government departments, agencies and the SA Reserve Bank last month all headed off to Morocco for face-to-face meetings with the FATF team that is now drawing up a report on SA’s compliance. That report, together with recommendations, will go into the FATF plenary sitting from February 22 to 24.

The delegation aimed to convince that the progress made in complying with FATF requirements is sufficient. It could point to achievements like passing two omnibus bills that amend various pieces of legislation to bring SA into line with the FATF’s technical requirements. It could also point to the nearly 30 prosecutions that have been launched regarding state capture, and efforts to extradite Eskom executives and the Guptas to face justice.

Effective enforcement

The problem, which I have argued since the prospect of greylisting emerged, is that it will not be enough to convince the FATF that there is effective enforcement of money laundering and terrorist financing law. There just aren’t enough people being put into jail.

While state capture has put the spotlight on corruption and money laundering, terrorist financing is a big concern of foreign counterparts. In 2022 the US treasury department added Durban-based Farhad Hoomer to its list of sanctioned individuals and named him as head of an Islamic State cell. He has been arrested twice before by SA police, the last time in possession of 5,000 rounds of ammunition, various guns and a cellphone jammer. The first time was in 2018 after a murderous attack on a mosque and the discovery of several bombs. But both cases were dropped over procedural failures. It is the sort of example that buries our case.

The FATF issue is now diplomatic because it is ultimately governments that will be voting at that plenary. It was on the agenda when US treasury secretary Janet Yellen visited last month. The official announcement that followed was an agreement to co-operate on chasing down the proceeds from the illegal wildlife trade, which, while important, seems beside the point.

But read the press release carefully and it is clear that the agreement sets up formal co-operation between the US’s Financial Crimes Enforcement Network, and the SA Anti-Money Laundering Integrated Task Force (Samlit). These are platforms for all relevant agencies under the leadership of the countries’ respective financial intelligence services. Though wildlife crime is the official target, you can be sure that the co-operation will extend beyond that.

Of course, it goes without saying that the visit of Russian foreign minister Sergei Lavrov, who is officially sanctioned by the US treasury, a few days before Yellen, would hardly have helped the diplomatic effort.

The challenge SA faces is how to get off the greylist as fast as possible. The plenary will provide detailed guidance on what still needs to be done. SA can request a reassessment within 18 months. We will need to be determined to escape the list as soon as possible.

Theobald is chair of research-led consulting house Intellidex. This article first appeared on Business Day.